As you will have noticed from the pre-Budget media reports, despite the recent growth in the economy, coupled with the significant decrease in unemployment, Budget 2018 was expected to give little in the way of taxation cuts.
The Government has to adhere to the EU fiscal rules and not repeat the mistakes of the past; for example, by fueling too much capital expenditure in the construction sector.
The Minister introduced Budget 2018 as a balanced budget. The growth rate is expected to be 4.3 per cent in 2017 and 3.5 per cent in 2018. Unemployment is at its lowest since 2008 and forecast to fall to 5.7 per cent on average in 2018, approaching full employment.
There are external factors that could cause stagnation in the projected growth, including Brexit, the global terrorist threat and revised US trade agreements. The Minister has therefore signalled the introduction of a ‘rainy day fund’ with an initial transfer of at least €1.5 billion to it from the Ireland Strategic Investment Fund. Thereafter, annual contributions of €500 million are to commence in 2019.
On the expenditure front, the primary sectors with the greatest needs are housing, health and education. A number of measures have been announced to assist those sectors.
For SMEs, a new Key Employee Engagement Programme (KEEP) has been announced to support their efforts to attract and retain key employees by providing for an improved tax treatment on share options.
In a measure to reward work, the Minister for Finance provides an increase of €750 in the income tax standard rate band for earners, from €33,800 to €34,550 for single individuals and from €42,800 to €43,550 for married one earner couples.
With effect from 1 January 2018, the 2.5% rate is reduced to 2% and will apply to income from €12,013 to €19,372. The 5% rate will be reduced to 4.75% and will apply to income from €19,373 to €70,044. PAYE income in excess of €70,044 continues to be subject to USC at 8% and self-employed income in excess of €100,000 continues to be subject to USC at 11%.
In addition the Minister has confirmed that medical card holders and individuals aged over 70 earning less than €60,000 per annum will pay a maximum USC rate of 2%.
Amalgamating USC and PRSI
In the run up to the Budget Taoiseach, Leo Varadkar and Minister Donohoe had indicated their intention to integrate USC with PRSI. In the Budget speech, Minister Donohoe announced plans to establish a working group to plan the process of amalgamating USC and PRSI over the medium term. The intention of the process is not to narrow the tax base but to ensure that our personal taxation system is both competitive and resilient in the future.
The earned tax credit is being increased by €200, bringing it to €1,150.
The home carer credit is being increased by a further €100 to bring it up to €1,200.
Mortgage Interest Relief
Mortgage interest relief in respect of qualifying loans provided to owner occupiers between 2004 and 2012 to purchase, repair, develop or improve the home was due to expire from 31 December 2017. The relief has been extended to 2020, but in a tapered manner. The relief will be restricted over the coming years as follows:
- 75% of existing relief in 2018
- 50% of existing relief in 2019
- 25% of existing relief in 2020
No relief will be available from 1 January 2021.
Deposit Interest – DIRT
As provided for in Finance Act 2016, the rate of DIRT will be reduced by 2% for 2018. By 2020, the rate of DIRT will fall to 33%. There were no changes announced with regard to the rate of exit tax applicable to life assurance policies or fund investments.
Help to Buy Scheme
No changes were announced to the help to buy scheme introduced in Finance Bill 2016 for first time buyers.
Pre-letting Expenses – Rented Residential Property
A new deduction of up to €5,000 per property for pre-letting expenses of a revenue nature will be introduced for owners of residential property that has been vacant for a period of 12 months or more. A clawback will arise if the property is withdrawn from the rental market within 4 years. The relief will be available for qualifying expenses incurred up to the end of 2021.
Vacant Site Levy
Vacant site levy increases from 3% to 7% in the second and subsequent years in a measure to tackle ‘land hoarding’. The increased rate first has application from 1 January 2019. For example, any owner of a site on the vacant sites register who does not develop their land in 2018 will pay the 3% levy in 2019 and then become liable to the increased rate of 7% from 1 January 2019. In order to have the levy lifted, development should commence on the site.
Employee Tax Incentive for Electric Vehicles
A 0% benefit in kind (BIK) is being introduced for one year in respect of electric vehicles. Electricity used in the workplace for charging such vehicles will also be exempted from BIK. A review of BIK treatment of motor vehicles will take place in advance of next year’s Budget.
Key Employee Engagement Programme
As promised in last year’s Budget, the Minister announces a new Key Employee Engagement Programme (‘KEEP’), to support small and medium enterprises in their efforts to attract and retain key employees in a competitive international labour market, by providing for an advantageous tax treatment on share options. In summary, the incentive will allow qualifying companies to provide key employees with a financial incentive linked to the success of the company, provided certain qualifying requirements are met throughout the option-holding period. Gains arising on disposal of such shares to the employees should be subject to capital gains tax, currently at 33%, rather than income tax, USC and PRSI at the time of exercise. Full details of the new incentive will be included in the Finance Bill, but it is expected that it will apply to qualifying share options granted between 1 January 2018 and 31 December 2023.
Capital Acquisition Tax (CAT) and Capital Gains Tax (CGT)
The existing rates for CAT and CGT remain unchanged. There are no changes to CAT tax-free thresholds.
CAT Agricultural Relief and CGT Retirement Relief
Agricultural land used for solar farms will continue will be classified as ‘agricultural land’ for the purposes of CAT agricultural relief and CGT retirement relief. This is subject to a condition restricting the amount of the farm land that can used by the solar infrastructure to 50% of the total farm acreage.
7-year CGT Relief
The holding period to qualify for the exemption from CGT for certain land and buildings will be reduced from 7 years to 4 years. The full exemption on capital gains will now apply to those assets disposed of in years 4 to 7 after acquisition.
Commitment to 12.5% Corporation tax rate
Consistent with previous years, the Minister reaffirmed Ireland’s 12.5% rate of corporation tax, which he considers to be a ‘core part of our offering’. This commitment provides transparency, stability and certainty to potential investors.
Brexit Loan Scheme
Recognising the importance of stability the Minister introduced a €300 million Brexit loan scheme with competitive rates for SME’s, including food businesses, who are particularly encountering funding difficulties due to fluctuations in the sterling exchange rate. This will assist with short term working capital requirements during this challenging period.
Public Consultation on International Tax Strategy
Arising from the recent Seamus Coffey report examining Ireland’s Corporate Tax Code, which set out a roadmap for tax reforms over the next 4 years, the Minister emphasised the need for certainty in corporate tax affairs and announced a public consultation process in relation to international tax strategy.
Capital Allowances on Intangible Assets
In line with the recommendations of Seamus Coffey’s report, the allowable deduction for capital allowances for intangible assets, and any related interest expenses, will be limited to 80% of the relevant income arising from those assets in the accounting period. Further details will be included in the Finance Bill. This change relates to expenditure incurred by a company from midnight on Budget Day.
In practice, this means that, at a minimum, 20% of a company’s IP trading profits will be subject to tax each year. Any excess capital allowances above this amount will be carried forward for use in future years.
Energy Efficient Equipment
The Minister extended the accelerated capital allowance scheme for energy-efficient equipment to the end of 2020. Previously, this was due to expire at the end of 2017.
National Training Fund Levy
The National Training Fund levy will increase from 0.7% to 0.8% from 1 January 2018. This is payable by employers in respect of the reckonable earnings of employees in Class A and Class H employments.
Hospitality & Tourism Sector
Despite media speculation before Budget Day the 9% VAT rate has been maintained to continue to promote the tourism and hospitality sectors in Ireland. This has been a challenging period, due to recent currency exchange rate fluctuations.
The VAT rate on sunbed services will increase from 13.5% to the standard 23% rate from 1 January 2018. This is in accordance with the Government’s National Cancer Strategy.
A VAT refund scheme will be introduced to compensate charities for the irrecoverable VAT they incur on their inputs. This will start in 2019 in respect of VAT expenses incurred in 2018 and will be based on their level of non-public funding.
The excise duty on a pack of 20 cigarettes is being increased by 50 cents including VAT, with a pro-rata increase on other tobacco products from midnight on Budget Day. There have been no changes on duties relating to alcohol, diesel or petrol.
A ‘sugar tax’ on sugar-sweetened drinks will be introduced from 1 April 2018, subject to State Aid approval. The tax will apply to drinks with sugar content between 5 grams and 8 grams per 100ml at a rate of 20 cents per litre. A second rate will apply for drinks with a sugar content of 8 grams or above at 30 cents per litre.
VRT (Vehicle Registration Tax)
The Minister indicated he would present proposals for discussion in 2018 in relation to VRT on leased vehicles to meet the requirements of a recent ECJ judgement (Case C 552/15 European Commission v Ireland 19/9/2017).
Carbon Tax Review
The Minister announced that his officials and the Economic & Social Research Institute will carry out a review of carbon tax. This is with a view to bringing forward proposals in Budget 2019 around the role of the tax in driving changes in behaviour in households and businesses.
The rate of Stamp Duty arising on the transfer of non-residential property will increase from 2% to 6% with effect from midnight on Budget Day. This new 6% rate will not only apply to transfers of land and commercial property but also to contracts for the sale of other types of assets, such as debtors and goodwill. There are no transitional measures proposed.
The Minister also introduced a stamp duty refund scheme in respect of commercial land purchased for the development of housing. Subject to qualifying conditions, developers will be required to commence development within 30 months of the land purchase to claim the refund. More details concerning the refund scheme will be included in the Finance Bill.
Consanguinity relief for stamp duty on intra-family transfers of farms will be extended for a further three years. A 1% rate of stamp duty applies to these transfers. The exemption for young trained farmers from stamp duty on agricultural land transactions continues.
Additional funds are being allocated to the Revenue Commissioners to increase its technical capacity to tackle complex tax avoidance and transfer pricing cases, with specific reference to the Revenue’s Competent Authority role.
In preparation for the PAYE modernisation, a range of compliance interventions will be made to ensure compliance with employer PAYE obligations, with a focus on ICT capacity and data analytics.
Irish taxpayers have been resolute in helping to rebuild the economy and have endured the increased tax charges with minimal complaint. However the Government cannot continue believing that a small increase in net income each year will appease the taxpayer, as the rate of tax for the majority is higher than in many countries, including our neighbours. More needs to be done to introduce innovative measures.
The Government also needs to tackle imminent issues, such as local property tax, which has been frozen since 2013, with the tax take expected to increase significantly in 2019, as a result of the increases in property values. While the KEEP scheme will assist with employee rewards and greater share ownership, it does not go far enough. The rates of CGT and CAT remain too high and the entrepreneur relief threshold needs to be increased to offer a genuine comparison with the UK regime.
The 2018 Budget is a neutral budget which, overall, will make little difference to net income for most taxpayers. Whilst many taxpayers may be willing to forgo meaningful decreases in tax for an improvement in services, if the promised improvements in housing, health, education and other services do not materialise, they are unlikely to be as accommodating in future years.